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CHICAGO BOARD OF TRADE MARKET NEWS

Outlook: Tuesday was the first trading day of the New Year and the afternoon’s close of the March contract at $6.5850 was 82 cents above the December 15^th low of $5.7650. Consequently, there was some profit taking during the remainder of the week. It is normal market behavior to have a four-day sell-off after a substantial run-up. Then, market participants must decide whether or not the rally will continue going into next Thursday’s (January 12) Grain Stocks report and final 2011 production estimates. The contents of the upcoming stock report are difficult to accurately anticipate. Recent inconsistencies in implied feed usage could be the result in underestimating production. As a result, there is no guarantee that the reports will be bullish. After next Wednesday, USDA’s next major report will be Prospective Plantings on March 30^th.

Feed grain prices are likely to remain volatile going into the Prospective Plantings report and numerous market participants are attempting to predict the outcome. A common means to estimate corn acreage is to analyze the November soybean and December corn ratio during the February-March time period. Historically, a ratio declining below 2.4 would increasingly give farmers an incentive to plant corn rather than soybeans.

The November 2012 soybean and December 2012 corn contracts currently have a ratio of about 2.05. That typically would encourage farmers to plant corn when prices were trading closer to the cost of production, but traditional corn consumption is now being outbid by energy demand. Energy demands 70 percent of a bushel of corn but less than 20 percent of a bushel of soybeans. As a result, it makes sense for there to be some downward adjustment to the normal soybean to corn ratio as energy demand gives greater support to corn than soybean prices. However, the competition remains intense for acreage and the pendulum will not always swing toward corn.

The November soybean to December corn price ratio could rebound some this spring due to the combination of South American weather concerns and increased uncertainty about the influence on corn prices from the end of the federal government’s Volumetric Ethanol Excise Tax Credit (VEETC), particularly if there is an increased usage of RINS (ethanol credits). If the soybean to corn ratio is less of a concern, then it may be relatively easy to plant beans and reduce worries about input costs and potential problems resulting from repetitive corn-on-corn planting. Spring weather will also be a major factor, but the final result could be 2012 planted corn acreage that is below the current expectations of various commodity analysts. Obviously, a combination of surprisingly less corn acreage, tight stocks and any weather threat could ignite an aggressive upside move prior to pollination. After two consecutive years of disappointing yields, market participants will look of more certain evidence before aggressively pressing prices lower. Such factors imply that prices will remain volatile prior to, and perhaps beyond mid-summer pollination.

As mentioned at the beginning of this commentary, the March contract rallied 82 cents from the December 15^th low of $5.7650 to the first trading day of 2012. On December 16^th, it was pointed out that ethanol and livestock producers had an opportunity to take some preemptive action. While this outlook commentary does not define specific strategies, is it created to assist members by bringing the prospect of impending factors to their attentions.

CBOT MARCH CORN FUTURES

Current Market Values:

U.S. WEATHER/CROP PROGRESS

U.S. Drought Monitor Weather Forecast: During the next five days (January 5-9), warmth expanding eastward from the western and central U.S. will gradually displace cold air in the East. Some light precipitation will fall across the Southeast and from the Great Lakes region into northern New England. Elsewhere, significant precipitation will be limited to the Pacific Northwest and the northern Rockies. Some light precipitation may occur toward the end of the period in the Great Basin and the Southwest.

The CPC six- to 10-day outlook for January 10-14 calls for near- to above-normal temperatures across the contiguous U.S., except for cooler-than-normal conditions in the southern Atlantic region. Meanwhile, below-normal precipitation from California to the central and southern Plains will contrast with wetter-than-normal weather in parts of the Southeast and across the nation’s northern tier. Follow this link to view current U.S. and international weather patterns and the future outlook: Weather and Crop Bulletin.

U.S. EXPORT STATISTICS

Corn: Net sales of 318,800 MT for the 2011/12 marketing year resulted as increases for Japan (194,700 MT, including 77,900 MT switched from unknown destinations), China (188,100 MT switched from unknown destinations), Mexico (125,700 MT, including 19,600 MT switched from unknown destination and decreases of 19,300 MT), Canada (25,400 MT), Taiwan (13,900 MT) and Honduras (11,600 MT), were partially offset by decreases for unknown destinations (285,500 MT) and South Korea (3,100 MT). Net sales of 26,400 MT for delivery in 2012/13 were reported for Japan (22,100 MT) and Mexico (4,300 MT). Optional origin sales of 90,000 MT were reported for Mexico. Exports of 946,300 MT were down 27 percent from the previous week and 6 percent from the prior four-week average. The primary destinations were to China (253,200 MT), Japan (250,500 MT), South Korea (174,900 MT), Mexico (165,000 MT), Taiwan (32,000 MT) and Cuba (26,200 MT).

Barley: There were no sales reported during the week. Exports of 200 MT were to Taiwan.

Sorghum: Net sales reductions of 1,000 MT were reported for Mexico. Exports of 23,700 MT were reported to Mexico.

FOB

DISTILLERS DRIED GRAINS WITH SOLUBLES (DDGS)

The DDGS market was rather quiet over the holidays. There seemed to be limited interest or response from buyers as DDGS followed corn prices higher. Container freight has been relatively available in the market, allowing traders to stay on schedule.

After the price run-ups in the second half of November and the first half of December, buyers seem to be somewhat skittish and some DDGS was even kicked out of rations.  Now, since cash prices are not moving upward at the same pace of corn, DDGS is starting to become a better value as a percentage of corn. However, there is some buying resistance in Mexico due to a high exchange rate. The strengthening dollar versus the peso has put the crunch on the Mexican buyer recently. Look for DDGS prices to remain strong in Mexico in the coming weeks. Current border values are at $270 per MT.

Comments and Trades reported:

Local Trade:

• 5000 MT traded in for Chicago delivered trucks at $222/MT
• 20,000 MT traded to panhandle of TX/Clovis at $247

Ethanol Comments:

The end of the federal government’s VEETC was encouragement for ethanol producers to increase production prior to the end of 2011. As a result, the supply of ethanol may have temporarily outpaced demand. Additionally, increased production has resulted in greater production of ethanol credits. The combination of ample ethanol supplies, increased RINs, weakened gasoline demand and volatile corn prices could combine to pressure ethanol producer margins for the first half of 2012. However, many ethanol plants are owned by companies with supportive financial resources and a staff with risk management skills. A number of those ethanol producers took advantage of the recent opportunity to lock in profitable hedges for the first half of 2012. Some of the smaller ethanol plants that remained exposed to market action may temporarily reduce production.

There are estimated to be about 1 billion RINs available for gasoline blenders and refiners to utilize, according to a story by Reuters. However, RINs are traded among companies and their prices fluctuate. Demand for RINS will only remain strong so long as their prices are more economical than actual ethanol. Supply imbalances will eventually be worked out, and the federal government’s ethanol mandate and growing exports guarantee future consumption for an important U.S industry.

COUNTRY NEWS

Argentina: Argentina’s weather has been a dominant news story in feed grain markets for the past few weeks. Improved rainfall is expected early next week and should improve conditions for corn and soybeans. However, that system is to be followed by a second round of hot and dry weather. The Buenos Aires Grain Exchange is assuming that rains over the next two weeks will revive parched fields, according to Reuters.

Brazil: Showers should also ease stressed corn in southern Brazil. However, Reuters reports that production in Brazil’s southern state of Rio Grande do Sul could be reduced by a quarter. The current La Nina weather pattern is primarily to blame for Brazil’s reduced corn production. The U.S. Climate Prediction Center is predicting that the La Nina weather pattern could last until May. La Nina is the cause of an abnormal cooling of waters shifting further down along the Pacific coast of South America.

China: It has now been a year since China instituted its probe on the alleged dumping of U.S. DDGS into its markets at unfair rates. According to Reuters, Chinese officials have decided to extend that investigation until the end of June 2012. The U.S. Grains Council has been working extremely hard to resolve this issue and has held a number of DDGS workshops in various locations across China.

OCEAN FREIGHT MARKETS AND SPREADS

OCEAN FREIGHT COMMENTS

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting:

The Christmas and New Year holidays in the western world are past, and everyone is slowly returning to work.

As should be expected, things are starting off slow and thin. As such, freight markets are ticking lower. There are reports of numerous ships ballasting to the U.S. Gulf in hopes of finding better values; however, this will likely only further depress the U.S. Gulf market. Overall, the markets were mostly unchanged over the last two weeks and finished off the first week of the New Year on a softer note.

Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:

The charts below represent total (MT) month-to-month Hong Kong container shipments for Jan.-Sept. 2009, Jan.-Sept. 2010 and Jan.-Sept. 2011.

INTEREST RATES